OT: Amero Hint?

But the part that sounds easy at first, but which really is the unanswerable economic question in discussions about money, is what does it mean that gold has "inherent" value? Its use value is a small fraction of its market price.

It's a form of mass hysteria. So gold-backed currencies depend upon mass hysteria, very much like the "irrational exuberance" that inflates house prices to many times their true replacement cost, and corporate stocks to several times their asset value plus any rational assessment of their earning potential. We buy gold because we believe that there is someone even more irrational than we are, who will pay at least as much for it as we paid.

In the 21st century, it's a hell of a note on which to base one's economic transactions.

-- Ed Huntress

Wrong thread, Ed. I took no position on use of gold as a currency.

The fact that gold has inherent value is not an argument for or against its use as a currency. Lots of things have inherent value. Some have been used as mediums of exchange, a few for millenia.

Use of gold (or any other commodity) as a medium of exchange is not irrational, although one can argue practicalities.

When people pine for the gold standard, what they are really saying is that they want a currency that the politicians cannot debase. Are they wrong? Is this fear irrational?

A good example of the issue is the silver versus gold money debates and William Jennings Byrant's Cross Of Gold speech. They just don't speechify like they used to.

In any event, there was a real policy question buried in that debate.

Joe Gwinn

Tell us what you mean by "inherent" value in this case, Joe. Or "intrinsic" value, as it's sometimes labelled.

If a commodity has utility value equal to its market price -- say, sheep -- then it's rational, although not very practical. If its market price is many times higher than its utility, or use value, such as gold, then there is no rationality to it at all. It depends on widespread irrationality.

Or, as has been argued, you can call it "symbolic" value. That's the way it's actually functioned over the past century or so, as central banks have held and traded it. They use it as an agreed-upon symbol of fixed value, even though it has little real value of its own. But for individuals, "irrational" is more appropriate. They aren't part of the agreement. They're just depending on what *other people* think it's worth.

That doesn't mean it doesn't work out well for those who trade it, because irrationality is quite a common human trait. d8-)

To the degree that it's based upon a supposedly immutable value, it's not rational. The "immutability" is itself a function of irrational behavior. There are arguments for a gold standard but they're a lot more complex than simply protecting against debasement.

Yeah, IIRC, that was all about freeing up credit for farmers. It wasn't a simple plea for debasement.

Jeez, I hope we don't get a long thread going about gold standards. It could make politics look like simple addition by comparison. d8-)

I have just that one request: I'd like to know what you mean by "inherent" value of gold.

-- Ed Huntress

Nothing more complex than that people were always willing to trade other things to obtain gold (in this case).

The problem with such reductionist utilitarian arguments is that people attach very different utilities to the same thing.

Which is fortunate, as it's the foundation of barter - if we trade object we may both end up better off or at least happier.

Yes, for at least ten millennia.

Immutable isn't the issue, and nothing is immutable. The issue is that gold is largely beyond the ability of politicians to manipulate.

The underlying issue was inflation, the theory being that inflation made it easier on borrowers (like farmers) because they could replay loans with cheaper dollars than those borrowed. Which is why bankers preferred gold.

But it couldn't work, as interest rates would adjust to compensate. The old rule of thumb is that the basic interest rate is 1% plus the rate of inflation.

From the standpoint of the economy the best answer is to have no inflation or deflation at all. Failing that, slow and predictable inflation can be lived with.

Simply that people want it, and always have. One can argue that they should not, but they do and always have, and that is enough.

Joe Gwinn

It sounds like we're on the cusp of a circular argument here. People will pay a lot for gold because it has intrinsic value, and gold has intrinsic value because people will pay a lot for it. It sure sounds like irrationality to me. d8-)

(Before we get too far off track, let me agree that your definition of fiat money, using the denotation for "fiat," is quite accurate and compact. I assumed that Harold could look up the meaning of the word on his own and that he was curious about what it really means to have fiat money. For example, the fact that money is used in a country by fiat doesn't explain why people in other countries will exchange it for their own currency. That's what I was trying to get at, and it's the question that always pops up very quickly in these discussions.)

There's always room for negotiation in barter. It can be a slow process, which is why most of us don't spend sheep. d8-)

So, given the circular arguments about "intrinsic" or "inherent" value, we're still left wondering where all that extra "value" comes from, without the benefit of utility. It seems to come from the same part of the brain where we get Ponzi schemes.

For most things, barter is based on real utility value. You can eat it, or fuel your car with it, or make a tool from it, etc. With gold, you can...look at it. Unless, like most gold bugs, you keep it in someone else's safe and never even see it.

Are you assuming 100% backing? Because, if you are, the electronic arbitrageurs will be shoveling money in and out of your treasury, shaving their fractions of a percent off of your currency value with each move, until they break your bank. It will be something like what George Soros did to the Bank of England, only on a much grander and more relentless scale.

And if you're talking about partial backing, that never prevented currency debasement before. I can't see why it would today.

How do you expect to prevent the manipulation of your money, gold-backed or not? BTW, there are ways to play the arbitrage game even with 100% backing, as long as you have worldwide open currency exchanges.

The only way to prevent it is to have an honest currency in the first place, one that accurately reflects your country's output of goods and services. And if you do that, you could back it with Fruit Loops and it would work just as well.

You'll note that central banking now typically targets inflation at 1% - 2%. Less than that, and you're always on the cusp of deflation, which nobody wants.

So, you're saying that there's no rationality to it. It's all a matter of habit. I agree. d8-)

-- Ed Huntress

It's no more circular than the old statement that what X is worth is exactly what people are willing to pay for X, no more and no less.

It doesn't matter if those people are fools, so long as they have much company.

In fact, you were explaining why fiat money was a good or bad ides, but never quite defined fiat money.

So, if we are using money we don't negotiate?

Nah. See above.

Barter is based on what people want, not what you and I think things ought to be worth ("have real utility value").

Nor does it matter if one barters, or simply pays.

By definition, gold coins are 100% backed (to the fraction of gold therin contained).

These things were likely attempted in ancient times, but given the near-universal value (in the sense of exchange rate) placed on gold, and the large cost of transportation, it wasn't done often, for lack of profits.

And it isn't necessary for something to be perfect for it to be useful.

A currency 100% backed with something of inherent value (unlike fiat currencies) automatically prevents such things. The problem was that it was too effective, and Kings found various ways to literally debase the currency. When people caught on (they always do), they discounted or refused the debased currency.

At least until commanded to accept it. And we have come full circle.

Yep.

I'm not sure that mere habit can explain something that has been held true for all of recorded history. There has to be something more fundamental than that for it to have remained universal for tens of millennia. Everyplace where gold was available, archeologists have found worked gold (usually jewelry), long before writing was invented. The other universal is that much of this jewlery could be made and sold today -- it's still in style.

Joe Gwinn

Well don't leave out silver, platinum, palladium rhodium and other metals. Factoring those in where would the price of gold be?

Wes

I have no idea. There's a research project for you, Wes.

-- Ed Huntress

But you are sooo much better at it ;)

Here's a middling-sized bunch of words.

also snipped---

Thanks, Ed. That was more than adequate. I, at least, understand what is being discussed now.

Harold

The harsh reality is that gold is not easy to market. I have years of experience in that field, and at one time was accepted as a reliable and honest merchant and refiner of gold and silver. I could move these metals at spot price with no difficulty. That is not possible today. I have been away from the game for 15 years, and am no longer recognized as a refiner. I can sell metals, but only at a loss. Unless you are properly connected in the precious metal industry, it's not all it's cracked up to be.

One thing in favor of securing one's assets is that gold, historically, has always been valuable. I expect it always will be, if for no other reason, it has qualities that endear it to industry and medicine, to say nothing of the psyche of people that think it's valuable, so it is. :-)

Harold

It wasn't 100% at the end. FDR took us off of the gold standard, paid citizens

If you look a it, gold redemption of script has been halted at times by various governments. Which means gold backed money may not be something you can rely on.

Wes

It sounds like an interesting business you were in, Harold, the details of which are basically unknown to most of us.

As for the enduring value of gold, it's an issue that's really gotten complex in recent years. Small margins make a difference in a commodity whose trading and business is based on stability (gold being the extreme example), and there are so many ways that small margins are shifting in gold today that the whole house of cards is in real danger. The subject is much too complex for discussion here, and I only know what the financial insiders report about it in the financial press, but a lot of people are worried right now about gold. Like a lot of things in finance today, the small players, individuals who hold and trade gold, are riding a train run by big financial interests, and it's one they can't see and mostly don't understand.

You may have had some exposure to it; it's based on the gold carry trade, gold stocks, and gold futures. It's a bubble on top of a bubble, the underlying bubble being the multi-millennial irrationality in gold's market price.

Enjoy your retirement. d8-)

-- Ed Huntress

It would be complicated, because platinum-group metals today are priced much more on their utility value than gold is. There is high demand for platinum and the related family in industry and consumer products, much of it for catalytic converters, and their decorative uses, except as platings, may have declined.

So it would be hard to sort out -- far beyond anything either of us could do, I'm afraid. That's a postdoctorate type of project for someone with a PhD in economics.

-- Ed Huntress

I avoided the futures market, dealing strictly with the metals, and the spot price at the moment. I know as much about the stock market as I knew about fiat money!

While there is turmoil in the gold market, I expect it will remain bold. It's a reflection on the instability of the dollar-----and is considered a good investment, even by those that may not normally be so inclined, when things get tough. While many have lost value in their investments, we have enjoyed an offset via the rising price of gold and silver.

My biggest concern is that it will continue to rise in price (note I did not say value). It is a reflection on the loss of value of the dollar, nothing more.

I spent more than twenty years of my life refining precious metals, including platinum and palladium. I also retorted a considerable amount of mercury, dental amalgam, in order to extract the silver. It was a hobby that got out of control, and was instrumental in closing the doors on my very successful, albeit humble, machine shop. It came at a good time, when I was totally burned out on machining. To this day, I do not take pleasure in running my machines.

Retirement, to me, has proven to have been an excellent decision. My only regret is that I didn't do so much earlier, although that was out of the question. Were it not for precious metals, I may still have been running those machines.

Thanks, Ed.

Harold

The demand for the platinum group metals has fallen drastically with the world economic crisis. Three months ago, or so, rhodium was selling for more than $10,000/ounce (no, that's not a typo). It is now right at $900. Platinum, which had gone over $2,000/ounce, is now $868. The auto industry was responsible, for the most part, in the run-up of prices. Strangely, while gold fell, it has recovered and is $816.30/ounce. Certainly down from the more than $1,000 it enjoyed previously, but still very strong as compared to the pt. group.

Strangely, it is known that platinum occurs at a rate only 10% that of the occurrence of gold, yet it has little more value. Gold has had a strangle hold on humans for a long time, and doesn't appear to be abating.

Harold

Be careful to distinguish "gold standard" (or "gold-backed") from "gold convertability." The latter types of standards have also been called "gold coinage standards." With gold standards, it doesn't matter much whether the gold backing is 100% or some fraction, as long as the controllers of the major currencies all agree about what it should be.

With some exceptions, most currencies haven't been convertible by individuals for 200 years. "Gold standard" really refers to a kind of tokenism used to set the relative values of different currencies, and the only gold trading is between authorized agents -- usually, central banks. That's what the whole developed worlds' currencies were based on under the Bretton Woods agreement. But the fact is that most major currencies were non-convertible throughout most of modern history. Convertibility is something that governments have turned on and off, mostly off, and almost always during and shortly after major wars. It has been impossible for any government to allow convertibility during times of economic stress, for hundreds of years. Their treasuries would be eviscerated if they tried.

Some of the gold bugs bring up the fact that even Alan Greenspan was in favor of gold standards, at least back in the mid-'60s. But he wasn't talking about convertibility. He was talking about using gold as a token for setting the relative values of currencies.

This is why I didn't want to get into a long discussion about the subject. d8-)

-- Ed Huntress

On Sat, 29 Nov 2008 17:53:02 -0500, the infamous Joseph Gwinn scrawled the following:

--m>> So, you're saying that there's no rationality to it. It's all a matter of

Shiny + pretty + durable + non-corrosive + semi-rare = value.

(Yoo hoo, Winniepoo! Query: Does the subject come up in _Predictably Irrational_, perchance?)

-- In all affairs it's a healthy thing now and then to hang a question mark on the things you have long taken for granted. -- Bertrand Russell

______ That part of the criteria is completely subjective, the rest OK. :-)

...lew...